California pension funds get burned again on real estate

California's two big public pension funds took fresh hits to their troubled real estate portfolios this week, suggesting the fallout from the real estate bubble hasn't completely run its course.

First up was CalPERS, which Wednesday walked away from a controversial Boston investment that cost it about $91 million.

Then came CalSTRS. A New York skyscraper it co-owns is about to go into default, a credit-rating agency warned Thursday. Default could cost the California State Teachers' Retirement System its share of a $75 million investment.

The two losses by themselves don't represent enormous drains on the pension funds, which control portfolios totaling $336 billion. But they show that the funds have yet to completely extricate themselves from the financial debacles that cost them a combined $100 billion in the fiscal year ended last June 30, including several billion in real estate.

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"Real estate remains a very difficult situation for us," said Joseph Dear, CalPERS' chief investment officer, in remarks to the pension fund's board last month.

Troubles in real estate and other sectors are straining the state and local government entities that rely on CalPERS and CalSTRS pensions. The California Public Employees' Retirement System is imposing rate hikes on state and local governments to help it recover from its investment losses. CalSTRS, which needs permission from the Legislature to raise rates, is preparing to introduce a bill next year.

Additionally, both funds are considering lowering their official forecasts of future investment returns, which could increase the funding pressure on state and local governments.

Real estate could be the biggest trouble spot for the foreseeable future. Ben Thypin, senior market analyst with New York consultant Real Capital Analytics, said all big real estate investors are continuing to struggle with post-bubble economics.

"I don't think it's going to get much worse," he said, referring to the market in general and not the California pension funds' investments. "That doesn't necessarily mean there won't be other bombshells."

CalPERS' real estate portfolio lost 47 percent of its value in a year's time and was valued at $13.7 billion at the end of January. CalSTRS' real estate holdings declined by 38 percent in the 12 months ending last June 30, falling to $13 billion.

In its latest headache, Cal-PERS this week notified Massachusetts officials that it's abandoning a massive mixed-use project called Columbus Center. The project, a six-building condo-hotel complex to be built over the Massachusetts Turnpike near downtown Boston, had been stalled for years. Besides financial problems, it got tangled up in a thicket of state and local politics, as neighborhood groups and some elected officials complained about the size of the project and the use of public subsidies.

State officials warned Cal-PERS last month that they were about to terminate a lease the developers need to build a deck over the turnpike. Now the CalPERS group is walking away.

"With the deterioration in the market, the project's no longer viable," said Steve Sugerman, a spokesman for Cal-PERS real estate consultant Wilson Meany Sullivan.

Sugerman said the investors spent $120 million on Columbus Center; CalPERS' share came to $91 million.